2004 (1) TMI 319 - AT - Income Tax

Summary

Issues Involved:
1. Treatment of expenditure on higher education as perquisite under Section 17(2)(iv) of the IT Act, 1961.
2. Obligation of the employee and employer's discretion in sponsoring higher education.
3. Business interest of the employer in incurring the expenditure.
4. Consistency in tax treatment for similarly situated employees.
5. Applicability of Section 17(2)(iv) regarding employer meeting employee's obligation.
6. Impact of the employer's decision on the employee's tax liability.

Issue-wise Detailed Analysis:

1. Treatment of Expenditure on Higher Education as Perquisite under Section 17(2)(iv) of the IT Act, 1961:
The primary issue was whether the amount of Rs. 11,73,015 spent by the employer on the appellant's higher education should be treated as a perquisite under Section 17(2)(iv) of the IT Act, 1961. The Assessing Officer (AO) treated this expenditure as a taxable perquisite, which was confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)].

2. Obligation of the Employee and Employer's Discretion in Sponsoring Higher Education:
The appellant argued that the expenditure was incurred by the employer company voluntarily and not as an obligation. It was emphasized that the decision to sponsor the appellant for an MBA course at the London Business School was taken by the employer company at its own discretion to benefit its business. The appellant had no vested right under his employment contract to claim such sponsorship.

3. Business Interest of the Employer in Incurring the Expenditure:
The appellant contended that the expenditure was incurred in the best interest of the employer's business, aiming to diversify into merchant banking and other financial services. The expenditure was allowed as a business deduction for the employer, indicating it was incurred wholly and exclusively for business purposes. The appellant's higher education was intended to equip the employer company with specialized knowledge and experience in finance.

4. Consistency in Tax Treatment for Similarly Situated Employees:
It was noted that another employee, Mrs. Sabita Gupta, who was similarly sponsored for higher education, did not have the expenditure treated as a perquisite in her hands. The CIT(A) had previously held that there was no benefit to the employee from the expenditure, and the Department accepted this order, making it final. The appellant argued that different yardsticks should not be applied to different employees in similar situations.

5. Applicability of Section 17(2)(iv) Regarding Employer Meeting Employee's Obligation:
Section 17(2)(iv) applies to any obligation of the employee met by the employer. The appellant argued that this section presupposes a pre-existing obligation of the employee, which was not the case here. The employer's decision to sponsor the appellant was voluntary and not an obligation the appellant was required to meet. The appellant would not have pursued the MBA course on his own due to financial constraints.

6. Impact of the Employer's Decision on the Employee's Tax Liability:
The appellant highlighted that the employer required a bond for the appellant to serve the company for seven years, with a clause to recover the expenditure as a loan with interest if the appellant did not comply. This arrangement indicated that the expenditure was not a perquisite but a business decision by the employer. The appellant continued to render advice and guide investment decisions for the employer, benefiting the company substantially.

Tribunal's Conclusion:
The Tribunal concluded that the payment made by the employer for the appellant's higher education could not be considered a perquisite under Section 17(2)(iv) of the IT Act. The decision to sponsor the appellant was taken by the employer in its business interest, and there was no pre-existing obligation on the appellant to pursue higher education. The Tribunal also noted the inconsistency in the Department's treatment of similar cases, as the expenditure for another employee was not treated as a perquisite. Therefore, the appeal of the assessee was allowed, and the addition on account of perquisite was deleted.